We’ve all seen the ads. “Need cash fast?” a speaker asks. “Have bad credit? You can get up to $1,000 within 24 hours.” The ad then directs you to a sketchy-sounding website, like 44cash.com, or a slightly-less-sketchy-sounding business, like PLS Loan Store. Most of us roll our eyes or go grab another beer when these commercials air. But 12 million people a year turn to payday lenders, who disguise the real cost of these loans. Borrowers often become saddled with unaffordable loans that have sky-high interest rates.

For years, states have tried to crack down on these deceptive business practices. Now, the Consumer Financial Protection Bureau (CFPB) is giving it a shot. On Monday, the New York Times reported that the CFPB will soon issue the first draft of new regulations on the $46 billion payday-lending industry. The rules are being designed to ensure borrowers have a better understanding of the real cost of payday loans and to promote a transparent and fair short-term lending market.

On the surface, payday loans sound like a good idea to many cash-strapped Americans. They offer a short-term loan—generally two weeks in length—for a fixed fee, with payment generally due on the borrower’s next payday. The average borrower takes out a $375 two-week loan with a fee of $55, according to the Pew Charitable Trust’s Safe Small-Dollar Loans Research Project which has put out multiplereports on payday lenders over the past few years. But payday lenders confuse borrowers in a couple of ways.

First, borrowers are rarely able to pay back their loans in two weeks. So they “roll over” the payday loan by paying just the $55 fee. Now, they don’t owe the $375 principal for another two weeks, but they’re hit with another $55 fee. That two-week, $375 loan with a $55 fee just effectively became a four-week, $375 loan with a $110 fee. If, after another two weeks, they still can’t repay the principal, then they will roll it over again for yet another $55 fee. You can see how quickly this can spiral out of control. What started as a two-week loan can last for months at a time—and the fees borrowers incur along the way end up dwarfing the principle. Pew found that the average borrower paid $520 in fees for the $375 loan, which was rolled over an average of eight times. In fact, using data from Oklahoma, Pew found that “more borrowers use at least 17 loans in a year than just one.”

Second, borrowers are often confused about the cost of the loan. The $55 fee—payday lenders often advertise a fee of $15 per $100 borrowed—sounds like a reasonable price for a quick infusion of cash, especially compared to a credit card with a 24-percent annual percentage rate (APR). But that’s actually an extremely high price. Consider the standard two-week, $375 loan with a $55 fee. If you were to roll that loan over for an entire year, you would pay $1,430 in fees ($55 times 26). That’s 3.81 times the original $375 loan—an APR of 381 percent.

Many borrowers, who badly need money to hold them over until their next paycheck, don’t think about when they’ll actually be able to pull it back or how many fees they’ll accumulate. “A lot of people who are taking out the loan focus on the idea that the payday loan is short-term or that it has a fixed $55 fee on average,” said Nick Bourke, the director of the Pew research project. “And they make their choice based on that.”

Lenders advertise the loans as a short-term fix—but their business model actually depends on borrowers accruing fees. That was the conclusion of a 2009 study by the Federal Reserve of Kansas City. Other research has backed up the study’s findings. “They don’t achieve profitability unless their average customer is in debt for months, not weeks,” said Bourke. That’s because payday lending is an inefficient business. Most lenders serve only 500 unique customers a year, Pew found. But they have high overhead costs like renting store space, maintaining working computers, and payroll. That means lenders have to make a significant profit on each borrower.

It’s also why banks and other large companies can offer short-term loans at better prices. Some banks are offering a product called a “deposit advance loan” which is nearly identical to a payday loan. But the fees on those loans are far smaller than traditional payday loans—around $7.50-$10 per $100 loan per two-week borrowing period compared with $15 per $100 loan per two-week period. Yet short-term borrowers are often unaware of these alternatives. In the end, they often opt for payday loans, which are much better advertised.

The CFPB can learn a lot about how to (and how not to) formulate its upcoming regulations from state efforts to crack down on payday lenders. Fourteen states and the District of Columbia have implemented restrictive rules, like setting an interest-rate cap at 36 percent APR, that have shutdown the payday-loan business almost entirely. Another eight states have created hybrid systems that impose some regulations on payday lenders, like requiring longer repayment periods or lower fees, but have not put them out of business. The remaining 28 states have few, if any, restrictions on payday lending:

The CFPB doesn’t have the power to set an interest rate cap nationally, so it won’t be able to stop payday lending altogether. But that probably shouldn’t be the Bureau’s goal anyways. For one, eliminating payday lending could have unintended consequences, such as by driving the lending into other unregulated markets. In some states, that seems to have already happened, with payday lenders registering as car title lenders, offering the same loans under a different name. Whether it would happen on a large scale is less clear. In states that have effectively outlawed payday lending, 95 percent of borrowers said they do not use payday loans elsewhere, whether from online payday lenders or other borrowers. “Part of the reason for that is people who get payday loans [are] pretty much mainstream consumers,” Bourke said. “They have a checking account. They have income, which is usually from employment. They’re attracted to the idea of doing business with a licensed lender in their community. And if the stores in the community go away, they’re not very disposed towards doing business with unlicensed lenders or some kind of loan shark.”

In addition, borrowers value payday lending. In Pew’s survey, 56 percent of borrowers said that the loan relieved stress compared to just 31 percent who said it was a source of stress. Forty-eight percent said payday loans helped borrowers, with 41 percent saying they hurt them. In other words, the short-term, high-cost lending market has value. But borrowers also feel that lenders take advantage of them and the vast majority want more regulation.

So what should that regulation look like? Bourke points to Colorado as an example. Lawmakers there capped the annual interest payment at 45 percent while allowing strict origination and maintenance fees. Even more importantly, Colorado requires lenders to allow borrowers to repay the loans over at least six months, with payments over time slowly reducing the principal. These reforms have been a major success. Average APR rates in Colorado fell from 319 percent to 129 percent and borrowers spent $41.9 million less in 2012 than in 2009, before the changes. That’s a 44 percent drop in payments. At the same time, the number of loans per borrower dropped by 71 percent, from 7.8 to 2.3.

The Colorado law did reduce the number of licensed locations by 53 percent, from 505 to 238. Yet, the number of individual consumers fell just 15 percent. Overall, that leads to an 81 percent increase in borrowers per store, making the industry far more efficient and allowing payday lenders to earn a profit even with lower interest rates and a longer repayment period.

Bourke proposes that the CFPB emulate Colorado’s law by requiring the lenders to allow borrowers to repay the loans over a longer period. But he also thinks the Bureau could improve upon the law by capping payments at 5 percent of borrower’s pretax income, known as an ability-to-repay standard. For example, a monthly payment should not exceed 5 percent of monthly, pretax income. Lenders should also be required to clearly disclose the terms of the loan, including the periodic payment due, the total cost of the loan (all fee and interest payments plus principal), and the effective APR.

The CFPB hasn’t announced the rules yet. But the Times report indicated that the Bureau is considering an ability-to-repay standard. The CFPB may also include car title lenders in the regulation with the hope of reducing payday lenders’ ability to circumvent the rules. However, instead of requiring longer payment periods, the agency may instead limit the number of times a lender could roll over a borrower’s loan. In other words, borrowers may only be able to roll over the loan three or four times a year, preventing them from repeatedly paying the fee.

If the Bureau opts for that rule, it could limit the effectiveness of the law. “That kind of tries to tackle a problem of repeat borrowing and long-term borrowing but that’s a symptom,” Bourke said. “That’s not really the core disease. The core disease is unaffordable payments.” In addition, it could prevent a transparent market from emerging, as payday lenders continue to take advantage of borrowers’ ignorance over these loans. “The market will remain in this mire,” Burke added, “where it’s dominated by a deceptive balloon payment product that makes it difficult for consumers to make good choices but also makes it difficult for better types of lenders to compete with the more fair and transparent product.” Ultimately, that’s in the CFPB’s hands.

Payday Loans Criticized at Grassroots Rallies in U.S.

Grassroots activists calling for stronger government limits on the payday loan industry took their message on Tuesday directly to the source: They protested in front of payday loan businesses at events in at least 10 states.

A member of the Colorado Progressive Coalition holds a sign calling for stricter policies governing the payday loan industry during a Tuesday rally in Denver. Photo source: National People’s Action

Their “ask” was straightforward: The federal government needs to protect consumers from an industry in which critics say offer high-interest, short-term loans that put millions of Americans in a debt trap.

The Consumer Financial Protection Bureau (CFPB) is considering new limits on the industry and collecting comments from consumers.

National People’s Action (NPA), which works on economic and social justice issues, helped organize the rallies.

“It’s time we started treating predatory payday lenders like the danger to our communities they truly are,” Liz Ryan Murray, NPA policy director, said in a statement.

“These high-interest lenders rob communities and families of their livelihoods and are every bit as toxic as an environmental disaster. The Consumer Financial Protection Bureau was created to protect working families from just this kind of abusive financial practice. Now, it’s time for action. The CFPB should implement real and lasting protections that will free consumers from the payday loan debt trap.”

Photo source: National People’s Action

The CFPB is expected to issue a proposal about the payday lending industry by the end of January. A final rule is expected later in 2015. The federal agency cannot regulate interest rates. But it could limit how long lenders can keep consumers in debt.

NPA said that 35 states permit some type of payday lending.

“While some states and cities have worked to pass local laws capping interest rates, federal laws still largely allow payday lenders to prey on vulnerable communities and benefit from borrowers’ financial hardship,” the grassroots group said in a statement.

NPA estimates that payday lenders earn $10 billion in annual fees by keeping about 12 million consumers in what they say is perpetual debt.

The annual interest rates for some loans can top 400 percent and there have been reports of lenders using pressure tactics against consumers so that they will continue to borrow more money, according to NPA.

Federal and state authorities have ordered Wells Fargo and JPMorgan Chase to pay a combined $35.7 million for taking part in a mortgage kickback scheme.

The Consumer Financial Protection Bureau and the Maryland Attorney General said Thursday that loan officers at both banks took cash payments from a now-defunct title company in exchange for business referrals.

Regulators said more than 100 loan officers at Wells Fargo (WFC) locations in Maryland and Virginia steered thousands of loans to Genuine Title, which went out of business last year, in exchange for cash.

Todd Cohen, a former Wells Fargo banker, allegedly had Genuine Title make “substantial cash payments” to his girlfriend at the time in order to avoid detection. The bureau has ordered Cohen and his now-wife, Elaine Cohen, to pay a $30,000 penalty.

Regulators said Wells Fargo failed to halt the scheme even though it was facing a federal lawsuit over the illegal activity.

“We have fully cooperated with the CFPB in this matter and have taken strong corrective action, including terminating team members,” Wells Fargo said in a statement.

The wrongdoing was less extensive at JPMorgan Chase (JPM). The bureau said at least six loan officers at Chase locations in Maryland, Virginia and New York helped steer 200 loans to Genuine Title. The bank has agreed to pay a total of $900,000 in penalties and compensation.

“We are fully committed to ensuring that our mortgage bankers comply with all legal and regulatory requirements,” Chase said in a statement. “These former employees clearly violated our policies, procedures and training.”

The CFPB said a third bank also took kickbacks from Genuine Title. But the bureau said it did not bring an enforcement action against that bank because it “self-identified” and took steps to correct the illegal action.

“These banks allowed their loan officers to focus on their own illegal financial gain rather than on treating consumers fairly,” said CFPB Director Richard Cordray.

WASHINGTON (AP) — Wells Fargo and JPMorgan Chase have agreed to pay more than $35 million combined to resolve claims that loan officers at the two banks received kickbacks in exchange for steering mortgage borrowers to a Maryland title company.

The Consumer Financial Protection Bureau said Thursday that JPMorgan and Wells Fargo each agreed to consent orders filed in federal court to settle the claims.

Wells Fargo has agreed to pay $24 million in civil penalties and $10.8 million to consumers affected by the scheme. JPMorgan is to pay $600,000 in penalties and about $300,000 in redress.

The CFPB and the Maryland attorney general found that loan officers at the banks referred borrowers to a now-defunct title company, Genuine Title, in exchange for cash and marketing services.

Federal law prohibits giving anything of value in exchange for a referral of business related to a real estate settlement service.

According to the CFPB, loan officers at Wells Fargo and JPMorgan sent homebuyers financing a mortgage through the banks to Genuine Title, which provided real estate closing services.

In return, the title company, which went out of business last April, provided the loan officers with cash, as well as consumer information and marketing services aimed at helping them drum up more loan business, the CFPB said.

“These banks allowed their loan officers to focus on their own illegal financial gain rather than on treating consumers fairly,” said CFPB Director Richard Cordray.

The CFPB noted that more than 100 Wells Fargo loan officers in at least 18 branches, mainly in Maryland and Virginia, participated in the scheme, referring thousands of loans to Genuine Title.

The agency also contends that Wells Fargo failed to stop the scheme, even though it had multiple warnings of what was going on, including a federal lawsuit that alleged the bank’s loan officers had illegal arrangements with the title company.

In a statement, Wells Fargo spokesman Tom Goyda said the bank has fully cooperated with the CFPB, fired the employees who were involved in the scheme and taken steps to enhance its procedures to provide greater oversight and monitoring of both the process and its employees.

The agency found that at least six Chase loan officers in three different branches in Maryland, Virginia and New York were involved in the scheme.

Jason Lobo, a spokesman for Chase Mortgage Banking, said the bank’s own investigation into the kickback scheme found six of its mortgage loan officers received marketing services, though not any cash, in return for steering borrowers on 191 loans to Genuine Title.

“We also found no evidence that borrowers incurred title fees in excess of the market rates,” he said.

Four of the Chase loan officers had left the bank when the scheme was uncovered. The bank fired the two others who remained, Lobo noted.

NEW YORK, Jan 4 (Reuters) – A U.S. regulator focused on consumer protection is planning the first federal regulations ever for lenders that make small loans to borrowers seeking cash before their next pay day, The Wall Street Journal reported on Sunday. The Consumer Financial Protection Bureau will convene a panel of small lenders early this year to discuss possible rules for payday loans designed to make them easier to repay, the report said. Consumer advocates say the loans, which can carry annualized interest rates of more than 500 percent, can trap primarily low-income borrowers in a cycle of mounting debt. They are concerned in particular about online lenders, which they say sometimes skirt state laws for payday loans. Until now, payday lenders have been regulated by states rather than by the federal government, but the CFPB and the Federal Trade Commission have both sued payday lenders for abusive practices. The CFPB also ordered payday lender ACE Cash Express in July to pay $10 million to settle accusations that it had used unfair debt collection practices such as threatening to sue borrowers to pressure them into taking out new loans. (Reporting by Emily Flitter; Editing by Leslie Adler)

There are more payday lenders in the U.S. than McDonald’s or Starbucks, reflecting economic conditions in which fast money is even more important than fast food.

Payday lending, in which users pay a fee for what amounts to an advance on their paychecks, has blossomed over the past 20 years. There are now more than 20,000 across the country, according to the St. Louis Federal Reserve, while McDonald’s boasts 14,267 locations.

They’re used most often by people who lack access to ordinary credit—often those at or near the bottom of the economic spectrum, with nearly a quarter living on public assistance or retirement income.

While the loans can fill a need for fast cash, they also can become a way of life for users who end up paying effective annual percentage rates, or APRs, well in excess of 300 percent.

Consequently, they’ve attracted the attention of regulators, politicians and economists why worry about those left behind in a decidedly uneven economic recovery.

“A large number of Americans are literally living paycheck to paycheck. They’re one unplanned expense away from being in financial distress.”

“A large number of Americans are literally living paycheck to paycheck,” said Greg McBride, chief financial analyst at Bankrate.com. “They’re one unplanned expense away from being in financial distress.”

McBride cited some sobering statistics: Twenty-six percent of Americans have no emergency savings and 41 percent say their “top financial priority” is simply staying current with their expenses or getting caught up on their bills. This is occurring even as the financial headlines trump new stock market highs by the day and President Barack Obama’s administration touts the U.S. economic recovery.

“Americans that have assets have seen the value of those assets appreciate, but Americans who don’t have those assets, they’re not feeling the recovery in their pocketbooks, particularly at a time of stagnant income,” McBride said. “If you don’t have those things, and you haven’t seen a pay increase, then you’re no better off, you’re no wealthier.”

Finding Themselves Poorer

Those using payday loans, in fact, may find themselves poorer.

The mean, or typical, payday borrower makes $22,476 a year and paid $458 in fees. However, a quarter of those borrowers paid $781 or more in fees due to repeat usage, according to the Consumer Finance Protection Bureau, which is closely monitoring the approximately $50 billion industry and will likely put forward more regulation.

About 48 percent of borrowers had done 10 transactions in the CFPB’s time sample, and 14 percent had more than 20 transactions. The median borrowing amount was $350, for a 14-day term. Median fees for $15 per $100, which computes to an APR of 322 percent.

In all, consumers using payday loans were on the hook to their lenders for 199 days, or about 55 percent of the year.

“It appears these products may work for some consumers for whom an expense needs to be deferred for a short period of time. The key for the product to work as structured, however, is a sufficient cash flow which can be used to retire the debt within a short period of time,” the CFPB wrote in a 2013 report studying the payday proliferation.

“However, these products may become harmful for consumers when they are used to make up for chronic cash flow shortages,” the report continued. “We find that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis, suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter.”

A year ago this month the bureau began accepting consumer complaints and received thousands soon after, according to the St. Louis Fed, which in its own recent report cited the potential for payday loans to “become a financial burden for many consumers.”

Payday lending is allowed in 36 states, and fees are lowest in the states that regulate them.

Bankrate’s McBride cautioned, however, that excessive regulation could be problematic if it ends up denying cash-strapped consumers who can’t get conventional loans or credit cards access to emergency funds.

“That’s a double-edged sword,” he said. “In some ways it can benefit consumers but in some ways it can hurt consumers. Limitations on how often that borrowed amount can be rolled over could keep consumers from falling into a bottomless pit of debt. But there’s certainly a fine line. These services exist because the demand is so high. The reality is a lot of Americans need short-term credit.”

Wouldn’t it be nice if you always had plenty of money to pay all of those pesky charges that come out of nowhere and blindside you? Unfortunately, cars break down, kids need money for a trip, and let’s not forget about that root canal.

When those unexpected expenses show up, where does the money come from? Ideally, your emergency fund will provide the cash. If that’s not an option, you might consider a cash advance.

How Cash Advances Work

A cash advance isn’t a single type of loan but a category that includes payday loans, cash loans against your credit card and others. A payday loan is a short-term loan against your upcoming paycheck. The lender gives you cash; when you get paid, you pay back the loan. Local lenders and national franchises offer payday loans.

A cash advance against your credit card allows you to receive cash much like a normal credit card charge. Each card issuer has different rules and features. Some allow you to withdrawal cash from ATMs while others send blank checks.

The Problem with Cash Advances

No loan is completely customer friendly and cash advances are no exception. In fact, many have exceptionally high interest rates. If you’re planning to use your credit card to borrow cash, you’ll pay an average of 24.4%– about 6% higher than the interest rate charged on regular purchases. See The 4 Worst Reasons For a Cash Advance.

A payday loan is even higher. Paying $15 to borrow $100 may not seem outlandish, but because of the short loan duration that works out to an average annualized rate of more than 400%.

But why worry about the annualized rate if the loan only lasts about two weeks? Because the loan is almost always rolled over. According to a recent study by the Consumer Financial Protection Bureau (CFPB), 80% of all payday loans are rolled over with 14 days of the previous loan. In fact, most loans are renewed multiple times throughout the year. For more on these problems, read Beware of Payday Loans.

Cash advances against a credit card are less pricey, but seldom used. A 2013 study by the CFPB found that only 3.1% of active credit card account holders took cash advances. Still, you’re likely to roll this loan into future months, too, costing yourself even more in interest payments.

How Necessary Is the Loan?

Cash advances, used sparingly and responsibly, can be an acceptable way to pay for that emergency repair or overdue bill – providing the loan isn’t constantly rolled over. If the fees associated with a late payment are higher than those of the cash advance, the cash advance is probably more cost effective.

Used once or twice a year, cash advances aren’t alarming. But if you find them turning into a habit, it’s time for a closer look at how you’re managing your money.

The Bottom Line

Cash advances are a Band-Aid solution that actually make the underlying situation worse by digging regular users deeper into debt. As CFPB Director Rich Corday explains, “The stress of having to re-borrow the same dollars after already paying substantial fees is a heavy yoke that impairs a consumer’s financial freedom.”

Statistics show that cash advances are addictive; most people who take them don’t use them just for random emergencies. If you find you regularly need a cash advance to make ends meet, drastic spending changes are in order.

Confront the problem: Ask for help from creditors, sign up for income-based payment plans where applicable and let utility companies know of your financial struggles. There’s help available other than cash advances.

Once you get back on a firmer financial footing, look ahead. If you don’t already have an emergency fund, find a way to start one. Check out Building An Emergency Fund and look at Investopedia’s tutorial Budgeting Basics.

Payday loans, also known as cash advances, are short-term, low-balance, high-interest loans typically at usury rates that are so-named because of a tendency for the funds to be borrowed on a post-dated check that is cashed on the borrower’s upcoming payday. These loans are designed to be quick and easy and generally have very limited qualification loan requirements.

Per the Consumer Financial Protection Bureau, or CFPB, most payday lenders only demand that the following conditions be met for a person to qualify for a loan: borrower must have an active checking account; borrower must provide some proof of income; borrower must have valid identification; and borrower must be at least 18. The qualification and loan application process can be as fast as 15 minutes if you can quickly show you meet all of the requirements. In most circumstances, the borrower writes a check for the loan amount plus a lending fee, and the lender holds onto the check until a predetermined due date.

Qualifying loan amounts vary depending on the borrower’s income and the payday lender, although most states have laws establishing maximum payday loan amounts. Some states even limit the ability of borrowers to have multiple outstanding payday loans in an attempt to keep consumers from borrowing large amounts at extremely high interest rates.

Loan requirements should not be the only consideration if you are thinking about a payday loan. In terms of annual percentage rates, or APR, it is not uncommon for payday loans to exceed 500% or even 1,000%. Even though business models and regulations limit the size and duration of payday loans, these types of loans are still an expensive alternative and should be undertaken with care.

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